by Duffy G. Elliott, CPA, CFP
As a business owner, you may not consider life insurance an integral part of your financial planning. However, life insurance is critical to an owner’s family, as well as the business, in the event of an unexpected death. In order to make sure both your family and your business are adequately protected, it’s important to purchase the
proper amount of life insurance coverage.
The amount of life insurance you need depends on your current net worth, the lifestyle you want to provide for your family, and ultimately, your personal desires. (see more detailed guidelines below).
For business owners, life insurance for the business is often referred to as “key man” or “key person” insurance. In this case the beneficiary of the policy is the business and not the owner’s family. The insurance is used to provide funds to help the business navigate through the change as a result of the loss of the owner. The funds may be used to buy out the owner’s family interest, find a replacement to lead the business, provide working capital to cushion any financial impact from the loss, or a combination of these options.
Key man life insurance is an important part of a business’ planning. Without it, all of the hard work by the owner and the sacrifices of the owner’s family could vanish.
A common rule of thumb is that you should purchase 5-7 times your annual income. Unfortunately, like most rules of thumb, this does not take into account individual circumstances and may leave you with an inadequate amount of insurance.
- First, you should consider how much your family will need every year, being sure to take into account the effects of inflation.
- Next, total your assets and other sources of family income. Be sure to include any benefits your family may be entitled to under any pension plans. If your spouse doesn’t work now, you need to consider if he/she would work if you died and how much he/she could earn. Don’t overlook social security survivors’ benefits available to your children under age 18 and to your spouse if he/she does not earn significant wages.
- Finally, determine how much life insurance you require. This will depend on how long your family will need this income, what rate of return can be earned on the insurance proceeds, and other factors.
Unfortunately, this is not a calculation that can be made only once. Since your needs will change over time, you should assess your insurance coverage periodically, especially if a major life event occurs.
To learn more about how life insurance plays an integral part of your business and personal financial planning, contact Duffy G. Elliott at Elliott & Associates Wealth Advisors at (770) 451-2446 or visit http://www.elliottandassoc.net/.